Home Equity Line of Credit – Use to Pay Off Your Mortgage

One Year Example of how to use your

Home Equity Line of Credit

to pay off your mortgage.

Ask for a free analysis of your finances here.

The way mortgage interest is calculated versus the way a home equity line of credit interest is calculated is a major reason why one can actually use a home equity line of credit to pay off a mortgage much faster while cancelling boat loads of interest charges as well.

Below is a list of 5 differences in the make up of these two home loans. MMA-5-differences-heloc-mortg

These differences are exactly the reason why you can borrow from your Home Equity Line of Credit to actually pay off your mortgage, saving a lot of interest.

It is a matter of moving the right amount of money, into the right account, at the right time, for the right amount of time. It is a game that can be played easily if you have the software to guide you on what to do and when to do it.

Below is a series of slides depicting 12 months worth of mortgage payments with 4 pre-payments borrowed from their Home Equity Line of Credit which is being charged an interest rate of 10%. The repayments only require interest and no principal too, by the way. Other types of lines of credit can also be used, besides a HELOC..

Let us first look over their amortized loan schedule so we can notice how much money is being paid in interest to the lender out of each months scheduled payment. Notice in month 1, $1,000 is paid to the bank and $199.10 is applied towards paying down the borrowed $200,000.

Month 2 shows us that $1 more is added to the amount of principal being paid off. After one year the ‘principal jump’ is less than $12.

amortized _wout_logo

If you google amortized mortgage calculator and enter in your mortgage information you will see how mortgage interest is front loaded because lenders know that the national average for a person to either sell or refinance their home and therefore stay in their current mortgage contract is 5.65 years. This means during the first 5 to 7 years of a mortgage, the interest rate you are paying for the mortgage is more like 80%. My last blog shows an average daily balance spreadsheet. Because HELOC’s interest is calculated using an average daily balance we can use these differences between  amortized and average daily  balance interest calculations to our advantage.

amortized_5yrsWe are assuming that this example couple has an income of $5,000.00 each month with $4,000.00 worth of expenses. This means they have $1,000 left over each month, that is available to them due to a variety of possible reasons; one possibly being they used their home equity line of credit to pay off car, student loans or credit card debts which freed up that $1,000.00. Or, another reason could be that they were paying more than the minimum balance required on their debts and so now they are allowing our software program to guide them where best to place those additional funds.

You will also notice that the $5,000.00 monthly pay cheque is being deposited into the heloc.

Why would you want to do that?

Because the interest is calculated on an average daily balance, therefore, the more money you deposit into the heloc and leave it there for the longest amount of time, the less interest you will be charged each month.

We are also assuming that this couple is purchasing a software program designed to guide them out of debt in the quickest way possible and that they paid $3,500 for that software which is why the HELOC is beginning with a balance of $3,500.00.

The oval on the left shows the amount of interest-only HELOC charges for each month.

MMA-Month-1-2

Notice the $20.83 + $12.50 + $34.80 = $68.13 of home equity line of credit, interest only, average daily balance, charges over three months.

Also notice that by borrowing $3,675.77 from the home equity line of credit and using those funds to make a principal only payment to one’s mortgage, this family knocked off the back end of their mortgage $17,249 of interest charges plus 21 months of monthly scheduled mortgage payments.

Because they have moved forward in the amortization schedule of their mortgage, they are now receiving an increase of $19.38 more from next month’s payment (month 4) towards the building of equity or paying off their debt.

MMA-month-3

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We can again see how this couple was charged first $26.46 in month 4 and then $18.13 in month 5 as interest charges on the average daily balance of their HELOC.

They are still depositing their income into their HELOC and paying monthly expenses from their HELOC. I will explain further how this is possible when you contact me.

MMA-month-4-5

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MMA-month-6

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MMA-Month-7-8

MMA-month-9

MMA-months-10-11Click Month 12 image for clarity

So for a cost of $297.89 of interest only charges on the money they borrowed from their 10% HELOC this family erased $50,862 of interest charges along with 53 months of monthly mortgage payments over one year. And they have jumped forward on their amortization schedule nearly 5 years and so are receiving $75.94 more towards paying off their principal instead of just 12 dollars in just one year.

Keep working this system  till your mortgage and your HELOC is paid off and you could save a substantial amount of interest. For the remainder of the years that you would have been paying your mortgage now instead, you can use the extra monthly income for creating an awesome future. Go to Financial Navigation Solution to learn about a software system that actually guides you on the fastest way to pay off your debts with little to no change in your budget or lifestyle.

I must point out though that there is now a system that allows you to use the same money you are paying your debts off with to also build wealth, create a retirement fund and also build a legacy, all at the same time. My next blog post will give more details on this system. Or apply now for your free illustration to see how to make the most of your hard earned money.

MMA-correct-30yrs

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September 4, 2009 · Jennifer · 10 Comments
Tags: , , , , ,  · Posted in: DEBT ELIMINATION, Home Equity Line of Credit

10 Responses

  1. markez linda - December 6, 2009

    I enjoyed this interesting topic and look forward to seeing more!
    we all know it is not easy as pie.

    regards

    Drew

  2. alex farguson - December 6, 2009

    I wanted to thank you for this great summary in a dreadful housing market! I certainly enjoyed every little bit of it and I have you bookmarked to check out new stuff you post.

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